Courts back away over contract nitty-gritty

Michael Becket on how the land lies on the legal front

12:09AM BST 13 May 2002

COURTS should not interfere in business contracts.

"Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement they should be taken to be the best judge of the commercial fairness of the agreement which they have made," said Lord Justice Chadwick.

The only exceptions are when one side has taken unfair advantage of the other or if a term of the contract "is so unreasonable that it cannot properly have been understood or considered".

He was delivering an Appeal Court judgment in the case of Watford Electronic, which claimed Sanderson CFL had not supplied a computer system of merchantable quality and reasonable fitness. The court said it was reasonable for Sanderson to exclude liability for indirect or consequential losses, even if caused by negligence, and to limit liability to the price paid by the buyer.

That means the terms are reasonable and so not covered by the Unfair Contract Terms Act. The judges said the question of which side took the risk for consequential losses was built into the price, so it was reasonable for the contract to mention it.

Legal firm Tarlo Lyons said the judgment "is in stark contrast with previous judgments concerning failed software development projects", in which the court said contract terms were manifestly unreasonable and hence unenforceable.

Previous cases now "appear to be extreme examples of judicial intervention in relation to the interpretation of exclusion clauses and it is arguable that the courts will adopt a less interventionist attitude in the future".

Criteria to help judges decide whether contract conditions are reasonable include the bargaining power of the sides, participation of legal advisers and the extent of negotiation. Whether it is reasonable to exclude penalties for negligence depends on each side's resources, including insurance availability.

Shops damaged in a riot can get compensation from the police under 1886 legislation, even if the police could have done nothing to prevent it. That has emerged from the insurers of the Yarl's Wood facility suing for the damage caused by the would-be immigrants setting light to the place.

Under the Riot (Damages) Act 1886 the claimant needs to show there was a riot. That needed only three people to be "tumultously assembled" for some common purpose when the law was passed, but probably nearer 12 now.

Tumult means they are excited, noisy, moving agitatedly and behaving "in such a manner as to alarm at least one person of reasonable firmness and courage". The person harmed should have taken precautions and offered no provocation.

But John Hanson of legal firm Barlow Lyde & Gilbert warned that the Government could well change the law rather than pay. In 1965 the House of Lords said damage caused to people's homes by British action during World War Two deserved compensation. Within months the War Damage Act was passed "expressly abolishing all owners' rights".

Stockport local authority has had to pay Mr Johnson £52,500 for his primary school failing to spot that he had dyslexia.

A policewoman called Rowntree got £135,236 from the taxpayer via the Metropolitan Police because she found policework stressful.

A six-year-old boy sued Hull City FC because he broke a leg playing football, and, though he recovered, he got £5,500.